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the value of collateral backing a loan may be less than supposed, and if a default occurs we may not recover the entire
outstanding balance of the loan.
Our expenses could increase as a result of increases in FDIC insurance premiums or other regulatory
assessments.
The FDIC, absent extraordinary circumstances, must establish and implement a plan to restore the deposit
insurance reserve ratio to 1.35% of estimated insured deposits or the comparable percentage of the assessment base at
any time the reserve ratio falls below that level. Bank failures during and after the recent recession depleted the deposit
insurance fund balance, which was in a negative position from the end of 2009 through the first quarter of 2011. The
balance had increased to $70.1 billion with a resulting reserve ratio of 1.09% as of September 30, 2015. The FDIC
currently has until September 30, 2020 to bring the reserve ratio back to the statutory minimum. As noted above under
“Regulation and Supervision – Deposit Insurance”, the FDIC has implemented a restoration plan that adopted a new
assessment base and established new assessment rates starting with the second quarter of 2011. The FDIC also imposed
a special assessment in 2009, and required the prepayment of three years of estimated FDIC insurance premiums at the
end of 2009. It is generally expected that assessment rates will remain relatively high in the near term due to the
significant cost of bank failures in recent years. Any further premium increases or special assessments could have a
material adverse effect on our financial condition and results of operations.
We may not be able to continue to attract and retain banking customers, and our efforts to compete may reduce
our profitability.
The banking business in our current and intended future market areas is highly competitive with
respect to virtually all products and services, which may limit our ability to attract and retain banking customers. In
California generally, and in our service areas specifically, branches of major banks dominate the commercial banking
industry. Such banks have substantially greater lending limits than we have, offer certain services we cannot offer
directly, and often operate with economies of scale that result in relatively low operating costs. We also compete with
numerous financial and quasi-financial institutions for deposits and loans, including providers of financial services over
the internet. Recent advances in technology and other changes have allowed parties to effectuate financial transactions
that previously required the involvement of banks. For example, consumers can maintain funds in brokerage accounts
or mutual funds that would have historically been held as bank deposits. Consumers can also complete transactions
such as paying bills and transferring funds directly without the assistance of banks. The process of eliminating banks
as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer
deposits and the income generated by those deposits. The loss of these revenue streams and access to lower cost
deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.
Furthermore, with the large number of bank failures in the past decade, customers have become more concerned about
the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits in an effort to ensure
that the amount they have on deposit with their bank is fully insured. Decreases in deposits may adversely affect our
funding costs and net income. Ultimately, competition can and does increase our cost of funds, reduce loan yields and
drive down our net interest margin, thereby reducing profitability. It can also make it more difficult for us to continue
to increase the size of our loan portfolio and deposit base, and could cause us to rely more heavily on wholesale
borrowings which are generally more expensive than retail deposits.
If we are not able to successfully keep pace with technological changes affecting the industry, our business could
be hurt.
The financial services industry is constantly undergoing technological change, with the frequent introduction
of new technology-driven products and services. The effective use of technology increases efficiency and enables
financial institutions to better service clients and reduce costs. Our future success depends, in part, upon our ability to
respond to the needs of our clients by using technology to provide desired products and services and create additional
operating efficiencies. Some of our competitors have substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new technology-driven products and services or be
successful in marketing these products and services to our clients. Failure to successfully keep pace with technological
change in the financial services industry could have a material adverse impact on our business and, in turn, on our
financial condition and results of operations.
Unauthorized disclosure of sensitive or confidential customer information, whether through a cyber-attack,
other breach of our computer systems or any other means, could severely harm our business.
In the normal
course of business we collect, process and retain sensitive and confidential customer information. Despite the security
measures we have in place, our facilities and systems may be vulnerable to cyber-attacks, security breaches, acts of
vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events.